This informative webinar discusses the ERC payroll tax credits that can be worth hundreds of thousands of dollars to your organization AND help qualified nonprofits keep their employees and organizations running during this pandemic.
The following is a text version of the recorded webinar presented by Windes on April 21, 2021.
The presentation slides can be accessed HERE.
Host & Moderator
Mike Barloewen, CPA, CGMA is a Partner and Chairman of the Audit & Assurance Services Department and head the Windes Nonprofit Group. He has over 20 years of experience working with nonprofit organizations, public companies, and entrepreneur-owned and investor-backed private companies.
Bella Wang, CPA, MST is a Tax Director and has more than 20 years of experience in public accounting and specializes in tax planning, consulting, and compliance.
Chérie Williams, CPA, MPA is a manager in the firm’s Tax department and has 10 years of experience, specializing in tax planning, compliance, and consulting for public charities, private foundations, and other exempt organizations.
DISCLAIMER: The information presented in this webinar is intended as general information and does not constitute tax or legal advice. You should always consult your tax, legal, or financial advisor for direction regarding your specific situation.
Please contact Windes for more information or questions regarding your particular situation at 844.4WINDES (844.494.6337) or via email at email@example.com.
It’s wonderful to see so many of our clients and friends of the firm joining us today. For those of you who don’t know me, my name is Mike Barloewen and I’m an audit partner here at Windes. I have the privilege of leading our nonprofit niche. A bit of background about Windes, for those we don’t know, we’re a 95 plus year old firm, headquartered in Long Beach, with offices in Irvine and downtown LA. Our nonprofit practice is a thriving sector of our business. We’re proud to be the independent auditors of 130 organizations of all different sectors in the non-profit world and we prepare Form 990 for over 140 organizations.
I am one of three audit partners with substantial nonprofit practice and expertise. We have a great bench of expertise within the firm and we have separate nonprofit tax expertise headed-up by my fellow partner, Donita and several managers, including my wonderful colleague Cherie, who’s presenting here today. Windes has a real passion for nonprofit organizations and we’re fortunate that our combination of expertise and client service approach, and fair prices, help us make a choice in the sector and we just love working with you all. I am excited to have the pleasure of introducing our two presenters this afternoon. Bella is a director in our tax practice and she’s become a real expert on all things CARES Act, the American Rescue Act, and employee retention credits. She has been at the forefront advising our clients in these matters.
Cherie is a manager in our tax practice and a key player in our nonprofit efforts in our tax niche. She’s a recognized expert in the area. I’m pleased to announce she’s been invited to speak at the AICPA National Conference this June. So if you’ve never attended that national conference, it’s wonderful. It will be virtual this year as we see, hopefully, the ending stages of this pandemic, keep an eye out for future communications from us that will include a discount code, should you be interested in signing up for this year’s national conference from the AICPA. It’s highly recommended.
As we go through this webinar, feel free to submit questions in the Q&A, and if we have time throughout the presentation, we will be answering those questions. If we get to the end and there’s extra time, we will answer more. For whatever reason that does not happen, we will circulate the questions and answers to all registrants and provide a link to this presentation. Hopefully, you’ll find this presentation informative and helpful and without further ado, I’ll hand this over to my colleagues, starting with Bella.
Thank you, Mike. Good afternoon. Thank you for joining us for the today’s webinar. We have a lot of material to cover, so I’m just going to go ahead and get started. Here’s today’s agenda. First, we’re going to talk about who can qualify for the employee retention credit, and you’ll hear me referring to the employee retention credits as ERC. Now I’m going to go over how to calculate and claim the credit. It is a payroll tax credit. The credit will be claimed on your payroll tax return and then we’ll talk about how the ERC can be interplayed with the PPP to maximize your PPP forgiveness. Then Cherie is going to cover compliance with the 990 filing for the ERC and other considerations you should be aware of.
Who qualifies for the ERC? So many people are not aware that they qualify for the ERC because they have a PPP loan. This was changed as a part of the Consolidation Appropriation Act passed in December 2020. Because of that new bill, now, even you have a PPP loan, you are eligible for the ERC, and you’re entitled to claim the ERC on the wages you paid retroactively to the wages paid after March 12, 2020. The credit also was extended to end of this year, until December 31, 2021. There are different rules that apply to the 2020 versus the 2021 ERC, which I’m going to talk about in more detail later in the presentation. Also, we’re going to cover how to interplay the ERC with the PPP because the rule is that you cannot claim both ERC and the PPP loan forgiveness on the same wages.
So, to qualify for the ERC, you must satisfy one of the following two criteria. You just need to meet one of them. First, you must have a significant reduction in your gross receipts during any calendar quarter in 2020 compared to 2019 or 2021 compared to 2019. Like I said, the credit is already being extended to end of this year, so you can be eligible for both years. And the gross receipts reduction requirements are different for 2020, you must have more than 50% reduction in the quarter’s gross receipts and for 2021 is 20% reduction. Let’s say you don’t have a significant reduction in your gross receipts, the second criteria that you can meet to qualify for the credit is that you had a partial or complete suspension of your business operation during the pandemic, which we are going to talk about later in the presentation.
Let’s talk more about gross receipts. For the gross receipts, you look at any calendar quarter, the first, second, third, or fourth quarter of 2020 compared to 2019. Let’s say for 2020, we are looking for more than 50% reduction in the gross receipts. As you can see on this chart, this is an example, in the first quarter, we have a 7% reduction, second quarter 65% reduction, third quarter 40%, and fourth quarter 15% for 2020. This is only for 2020. You qualify for the ERC until you hit at least 80% of the calendar quarter gross receipts compared to 2019. In this example, we know that in the second quarter you qualify for ERC because you have more than 50% reduction. In the third quarter, you did have more than 50% reduction, but you haven’t hit 80% of your 2019 Q3 gross receipts, so you still qualify.
In the fourth quarter, now you only have 15% reduction. So you hit the 80% of your 2019 Q4 gross receipt but the rule is that you still qualify for the fourth quarter until the following quarter. So in this example, you qualify for the ERC in Q2, Q3 and Q4. This subsequent quarter rule does not apply to 2021. For 2021 is a different rule. For 2021, the gross receipt reduction requirement decreased from 50% to 20% and also you are allowed to use an alternative method, or we call it a prior quarter safe harbor method, which means that you will qualify for the ERC for the quarter if you have more than 20% reduction in a gross receipt in the previous quarter. So, in this example, it isn’t comparing 2020 to 2021, you always compare to the 2019 calendar quarter gross receipts.
In this example, we are comparing 2021 with 2019. So, in the first quarter, you only have 15% reduction, you don’t have 20% reduction, so you don’t qualify for the ERC in the Q1 2021. In the second quarter, you have a 60% reduction, third quarter 12% and fourth quarter is 13%. We know for the second quarter, you definitely qualify because you have more than 20% reduction. In the third quarter, even though you did not have more than 20% reduction, you can apply. You can use the prior quarter safe harbor so that you still qualify for the ERC in the third quarter. In the fourth quarter, you don’t qualify because you don’t have more than percent reduction.
This is another example for 2021. In the first quarter you have 25%, second 17%, third 40%, and fourth quarter 15%. In this example, the first quarter you have more than 20% reduction, so you qualify. The second quarter, even though you did not have more than 20%, but the previous quarter had, so you qualify for the ERC, the third quarter you qualify because in that particular quarter, you had more than 20% reduction. The fourth quarter, you still qualify because you can use the previous quarter’s safe harbor. There’s a different rule when looking at 2020 and 2021, so just keep that in mind.
What’s considered gross receipts? For nonprofits, gross receipts include the proceeds of all your sales activity, investment income, insurance, dividends, rent, royalty, annuity, contribution, gift, grants and members dues. If you had sales and you collected sales tax from your customers, that’s excluded from your gross receipts. Sometimes we’ll get this question – are you allowed to use cash or accrual? Some clients may have used accrual for a gap basis, financial statement reporting purposes, but used the cash method for tax reporting purposes. There’s no definite guide on whether you are required to use cash or accrual, as long as you are consistent. So, if you are comparing the cash gross receipts for 2020, then you should use the same method for 2019 gross receipts.
The gross receipt reduction is an easier way to determine whether you qualify for the ERC or not. If you have a quarterly financial statement and the Excel spreadsheet, then you can simply do the math and see if you meet the 50% or 20% reduction requirement. Let’s say you don’t have more than the 50% or 20% reduction in gross receipts. The other way you can qualify for the credit is if you have partial or complete suspension of your business operation. So, you can see here on the slide, this is the actual language from the tax law itself, but there’s a lot of different angles to look at the suspension requirement. I’m going to go over some of the examples of the suspension rules for the governmental order.
Some of organizations also have the paycheck potential on the PPP loan. The safe harbor for your PPP forgiveness is that if you could not return to the same level of business activity as you had as of February 15, 2020, then even if you have the employee head count reduction or salary reduction, you can apply for the safe harbor and still get a 100% forgiveness. It’s very similar, but for the PPP forgiveness, it is a lot more liberal and easier to meet that safe harbor. For the ERC, there’s a different limitation and you have to look to see if you qualify for the suspension requirement.
Per the governmental order, it must be from either a federal, state, or local government. And for substantiation purposes, to support that you did have a suspension, it is highly recommended that if you take a position that you had a suspension of your business operation, you should have a memo or something in writing saying that you were complying with this governmental order, and that you had a suspension of your business operation.
Let’s talk about the suspension. First, if you are a non-essential business, then you most likely had a suspension when we had the stay-at-home order. Last year, we had the stay-at-home order for the period from March 20 to May 31st. During that period, if you had your business shut down, you closed your offices, then that’s considered a suspension over your operation. But there is an exception. If the governmental order required you to close your office, but it didn’t really change the way your employee work, the way you operate, then there’s no suspension. Here’s an example:
Let’s say you’re an employer, you’re a nonprofit organization. You have an office in a city where the mayor has ordered that only essential business can operate, can stay open. Before the governmental order, you already had most of your employee tele work. You already had everything set up so that everybody could work remotely. So, by following the governmental order, you are required to close your office, close your work place, but there’s really no change to the way your employees are working. Then in that situation, you are not considered having a full or partial suspension because there’s no change on the way you operate.
The other example is let’s say you operate a physical therapy facility in the city where you also had a stay-at-home order and you’re considered nonessential, so you are required to close your facility. Before the governmental order, everybody came to work in the office, nobody worked remotely. And because of the governmental order, your employees are restricted to come into the office. Instead of having an in-person meeting with the patient or the client in the office, you can only do an online lesson, or online meeting with the client. In that case, then you do have a partial suspension of your operation because you’re not completely shut down. You still have online access with your clients, but you do have a partial suspension of your operation in this case, so you do qualify for the credit.
Let’s say you are a non-essential business and you are doing the stay at home order or the governmental order, you have to close your business and you’re switching your employees from a work in-person to working remotely and there’s a significant impact to your operation while you’re making that change to remote work, then you are considered having a suspension of your operation during the transition time. So, whether or not you have the suspension and when you convert from working in-person to working remotely, there are several factors that the IRS will consider concluding that you have a suspension. First, if you have adequate support like IT, if you have an internal IT department or outsource IT firm that can help you transition from working in the office to working remotely. So that’s one of the factors.
Let’s say you didn’t have strong IT support and you had to spend a couple of weeks finding someone who could help you change from in-person to remote working, then that’s considered a suspension. The second factor that will be considered is that if you had enough portable work or if you are in a situation such as operating a lab, there’s really not much work that can be done remotely, then that’s considered a suspension.
The third factor they will consider is if the physical workplace is critical and necessary or if it’s just beneficial, not necessary, just more convenient. Of course, if having an employee work physically in the office is critical and necessary, then you must shut down and close your office, then that’s considered a suspension. But if you are just saying, “My employee can pretty much work from home, working remotely, but coming to office is really just for the employer’s convenience,” then that’s not considered a suspension. And if you have a situation that is beneficial, but not necessary, then the IRS will look at other factors and circumstances to see if you do have a suspension of your business operation.
So again, whether you have a suspension or not, they’ll look at whether you are an essential business or non-essential business, but let’s say you have both, then the other way to see if you qualify for this suspension requirement, for the non-essential part of your business, if you have to shut down, you have to close that non-essential part of your business, and it is considered more than 10% of your gross revenue or more than 10% of your employees time on providing that service? So here is an example: Let’s say you are a nonprofit organization, you have a book shop, and the shop is forced to close because of the governmental order, or the other example is we know a lot of schools were closed during the pandemic. If you’re a community service, you’re a church, you provide in-person service, but that part is suspended during the pandemic, then we have to see if the part that got suspended, if that constitutes more than 10% of your gross receipts.
So, here’s that the requirement, the gross receipts from the suspended portion of your business must be at least 10% of your total gross receipts or the hours over service performed by employees for the suspended portion of the business has to be more than 10%. And if it’s more than 10%, then you are considered having a suspension.
Here’s another example: You can have a suspension of your operations, even though you are an essential business. Let’s say a 100% of your operation is essential. You never closed your doors, you continued to operate, but you have a significant interruption in your supply chain. Let’s say you are a nonprofit organization. You are considered essential, but one of your major suppliers is forced to close because of the governmental older. Because the supplier is closed and you have no way to find a replacement, there’s no way for you to find someone who can provide what you need, then that’s considered a suspension of your operation.
Let’s say you are an essential business, but you have to reduce your operating hours because of the governmental older, then that’s also considered a partial suspension of your operations. For instance, before the pandemic, you were running 24 hours shifts and because of the governmental order, now you must allocate some of the time to close the facility for cleaning and sanitizing. Because of the governmental order, you had to reduce your operating hours, then that’s considered a partial suspension of your operation.
I know this webinar is for nonprofits, but an easy example will be the operation of a restaurant. A lot of restaurants, cafes and retail stores had to close indoor operations, but were open for pickup and delivery. This is considered having suspension of your operation even though they never closed their doors.
Like I mentioned earlier, there’s a limitation. If you are considered an essential business and you never close your doors, but your customers or your clients have to stay home because of the stay-at-home order, then it is not considered a suspension of your operation. I’m going to use a mechanic shop. Let’s say you operate an auto repair service business. You’re considered an essential business, so you are not required to close your location or close your operation, but because of a governmental order, all your customers stay home, since travel is limited. Because of the stay-at-home order, your revenue drops significantly. In that case, you are not considered having a suspension of your operation just because your customers can not come visit you.
However, even though you don’t meet the suspension requirement, you may meet the significant reduction in your gross receipt requirements. So even if you don’t meet the substantial criteria to be eligible for the credit, you may be able to meet the gross receipts requirement. So again, to determine whether you qualify for the credit, you will look at both criteria and see if you meet one of them, or it’s possible you can meet both of them. The second bullet point here is that if you voluntarily reduced your operation’s hours because of COVID, is not considered a suspension of your operation – your operation is impacted because of the government order.
I want to briefly talk about the aggregation rule. I’ll talk about more in the later part of the presentation, but let’s say if you have several nonprofit organizations, they are related, or they are considered a related party and you have to aggregate under the single employer rule for the suspension requirement that you look at the aggregate group as a whole. Let’s say you have several nonprofit organizations in the aggregate group, and only one of them has a suspension. Then it’s considered that all the members in the group have a suspension and everybody qualifies for the credit. So the aggregation rule is beneficial for the suspension requirement. It may not be beneficial for the number of employees or the gross receipts. The number of employees, that’s very important when we talk about how to calculate your credit. And then gross receipt is that when you are calculating whether or not you have more than 50% or 20% reduction in your gross receipts. If you are considered an aggregate group, you must look at the group’s gross receipt as a whole
Bella, before we move on to the next section, if you don’t mind, just a few related questions mostly around the concept of gross receipts.
You mentioned in your slide about gross receipts, that interest income and dividend income are included. Would you include unrealized investment gain or loss as gross receipts for a nonprofit organization that typically ends up on the same investment income line item on the statement of activities?
No. You don’t include unrealized gain, but if you have a realized gain, like capital gain from the selling of a security investment, then that’s included in your gross receipts, but since it’s unrealized is not included in your gross receipts.
Okay. And then as it relates to the PPP loans that people received, that they earned forgiveness on or satisfied the conditions, they’re recognizing them as grants, grant income, conditional grants that have been satisfied. And so they’re recognized revenue, would that be included in gross receipts?
No, it will be excluded. IRS guidelines states clearly that you exclude the PPP forgiveness income in a gross receipt calculation.
Yes. I think that’s it.
Great, good question. So now let’s move on and let’s say you determine you qualify for the credit under the gross receipts test or suspension test, then how did you calculate the credit? Here’s the quick chart. As I mentioned earlier, there’s a different rule applied to 2020 and 2021. The credit is a lot more liberal for 2021 and is a lot higher. For 2020, again, you only apply to the qualified wages. And when I say qualified wages, is actual wages, plus the healthcare benefit paid for your employees. For 2020, it is the qualified wages and the healthcare benefit you pay after March 12th, your end of the year. And of course it’s only during the period you qualify. If you qualify for the credit because of the suspension, let’s say you had a suspension of your operation from March 20 to June 1st, then the entire two quarters, the first and second quarter, will qualify for the credit.
The credit amount for 2020 is 50% of qualified wages and the healthcare benefit cap at $10,000 per employee, per year. If you do the math, it is 50% on 10,000. It’s 5,000 per employee, per year, that’s for 2020. For 2021, the credit got extended to your end of this year and the credit rate is 70%. And the maximum wages is 10,000 per employee per quarter. So it’s a 7,000 credit per employee per quarter. So it’s 28,000 for the whole year. So let’s say if you qualify for the ERC for the entire all four quarters, then it’s 28,000 per employee. If you have a hundred employee, then you’re talking about $2.8 million of the credit. So it can be a very significant amount available for the employer.
As I mentioned, the qualified wages is the salary you pay to your employees, including base salary, commission, bonus. There’s a different rule for vacation, paid time off, and sick pay, which I’m going to go over a little bit later, but it’s the wages and the healthcare benefits. Any wages that’s exempt from FICA, which is good tax is not eligible for the ERC. And also, the wages we talked about such as no double dipping, so you cannot use the same wages for PPP forgiveness, and also for the credit. In addition, the wages that’s reimbursable by any governmental grant is not eligible for the credit.
There’s a different rule for what we call large employer versus small employer. For 2020, large employer is any employer who has more than a hundred full-time equivalent employees in 2019. Again, you are looking at the total number of a full-time employees you had in 2019. As I mentioned, the credit got a lot better in 2021. So, for 2021 ERC, the number of employees limit increased to 500. So as long as your total full-time employee head count did not exceed 500 in 2019, for 2021 ERC, you are considered a small employer. And there’s a difference on how the credit is calculated for large employers and small employers. So it’s very important to know whether you’re considered a large employer or not.
Let’s say you are a larger employer and we’re looking at 2020, you have more than a hundred full-time employees in 2019. If you are a large employer, only the wages you pay to employees while they were not working qualified for the credit. For example, you are a school, an educational institution, and because of the governmental order, you have to discontinue all in person teaching. You can only provide online teaching to the student on a limited basis. You had more than a hundred full-time employees in 2019, so you’re considered the large employer. In 2020, you continue to pay all your staff at the full rate but they only work, let’s say 60% of the time. Since they were still working in 2020, the amount of salary paid for 60% of the time they were working, does not qualify for the ERC, but the additional money you paid them for not working, that qualifies for the ERC.
Again, this only applies to large employers. for a large employer, you can only claim ERC on the wages paid while the people are not working. And also, the other limitation for large employers is that let’s say during the shutdown period or the suspension period or when you had more than 50% reduction in the gross receipts period, you paid your employees for accrual vacation, accrual holiday, and accrual sick days. Those are all accrual from the pre pandemic time being a large employer, you cannot claim on those salaries, even though those were paid during the suspension period.
And the other limitation is that if you are a large employer, if you increase the salary for a certain employee just because they do more work, while some other people are staying at home, you cannot claim ERC on the additional wages you paid. One example is let’s say you are a nonprofit organization that operates a food bank. Due to the governmental order, you had to limit your store hours, and because of the reduction in your store hours, you had to cut your workforce, but some people end up coming to work more because they are in the essential function of your operation. Because you are trying to keep them coming to work, you give then a pay raise. You give an additional $2 per hour. If you are not considered a large employer, the $2 an hour, your additional pay does not qualify for the ERC.
This is just an example of how you calculate the credit. Let’s say you are a large employer, you had more than a hundred employees in 2019. Two of your employees are John and Mary. John only works 60% of the time compared to the pre pandemic period. Mary is not working at all. And during the period you qualify for the ERC, you pay John total wages of $12,000. Mary’s total pay is $16,000. Because John still works 60% of the time, so only 40% of his wages qualify for the credit. So, $12,000 times 40%, that’s $4,800. And you also pay their health insurance, $1200.
For John, the qualified wages, plus insurance is $6,000. And since this is 2020, the credit is 50% of the qualified wages plus insurance. The credit is $3000. For Mary, since she’s not working at all, all her wages qualify for the credit. So, her wages, plus insurance that’s $10,800, since that’s over the $10,000 limit, then we cap at $10,000 and the credit is 50%. So you got $5,000 credit. Again, this is the rule for a large employer.
For smaller employers, you don’t have the limitation on the wages paid while the employee is not working. If you are considered a small employer, all the wages you pay during the qualifying period would be eligible for the credit. And also, we talk about vacation time, accrual sick time, or a holiday pay. If you are considered a small employer, then you can claim credit on the vacation, sick pay or holiday that was paid during the qualifying period. That’s why it’s important to know whether you’re large or a small employer because the credit can be different. And again, the number of employees threshold got increased from 100 to 500 for 2021. In 2021, as long as your total full-time employee headcount is under 500, then you are considered a small employer and all the wages paid in 2021 will qualify for the credit.
This is another example. If you have less than a hundred employees in 2019, all wages qualify for the credit. Again, you have a John and Mary, one working, one not working, but we don’t care for smaller employer because all wages qualify. For John, the total wages plus insurance, $8,400. The credit is 50% of the qualified wages, which is the $4,200. For Mary, again, her wages plus insurance is over the $10,000 limit. Then the credit is still cap at $5,000. Your total is $9,200.
What’s considered a full-time employee? The definition, as you may remember if you have a PPP loan, calculating the full-time employee headcount is different. You look at the 40 hours. If the person works 40 hours or more then that counts as one, 40 hours or less, that’s a 0.5, or you just take the ratio of number worked a week to calculate the average FTE head count. For ERC purposes, the definition is a little bit different. When you’re calculating your full-time employee head count in 2019, you look at anybody who work at least 30 hours, or more, a week or 130 hours a month. When you look at 2019, you add up your total full-time employee head count for each month, and take the total divided by 12 to get an average. Again, we’re talking about the aggregate group. If you are considered related, then you have to aggregate all the members in the aggregate group to calculate if you exceeded the hundred or 500 employee head count in 2019.
So, who is considered an affiliate? You’re considered one single employer if you are a parent subsidiary group, you have the one company only. The other company, your parent’s subsidiary, and you have a common ownership then that’s considered an affiliate group or if you, a brother, sister, that’s commonly owned by five or fewer people, then you’re considered an affiliate group, or if you have any related service. Let’s say you’re a nonprofit organization running a thrift shop. The other organization was set up separately for doing the community service, but they relate to each other. The service they provide to the members are all related. Then you’re considered an affiliate group.
Let’s say you are part of your member or affiliate group or aggregate group, how do you allocate the ERC? The ERC will be allocated based on the wages paid by each member. So, it’s still going to be based on how you file your payroll tax returns. Let’s say your organization A has a million dollars in wages, organization B has a two million dollars in wages, then that’s how you allocate the ERC based on the wages you report on your payroll returns. So now we are going to go over how to calculate the credit. You know you are eligible for a million dollar credit, then how are you going to claim it? So now we know we already finished 2020. If you now go back you say, yeah, even though I had a PPP loan and I have a suspension of my operation in 2020, I qualify for the credit for 2020, how do I claim it, as well as the credits on my payroll return Form 941?
Since you already filed your Form 941 for 2020, you will have to go back and amend your 2020 form 941. The 941 is filed on a quarterly basis. Let’s say you qualify for the ERC in the second and third quarter, then you will have to go back and amend your second and third quarter Forms 941. For 2021, now we are almost at the end of April. If you haven’t filed your first quarter 941 for 2021, you can claim the credit on your timely file of Form 941. If you refile your first quarter 2021, Form 941, then same thing. You will have to go back and amend. To amend your 941, you file Form 941X. The problem is the 941X has to be filed on paper. Now, when you timely file 941, you can file electronically, but the 941X has to be filed on paper.
IRS currently has a huge backlog. We were told that the IRS is still processing the 2019 payroll paper returns, so it can take a while for you to see that refund coming back to you. Right now, the census is that it may take five to six months for the IRS to process those amended 941s, the 941Xs. It could take a while to get that refund check. The recommendation is that if you can claim a credit when you file Form 941, it will be better because then you can get the refund much quicker.
You know you will qualify for the credit for the 2021 Q2, Q3. And again, the credit is going to be significantly higher than your payroll tax liability because your payroll tax liability, including the employee portion is 15.3%, but the credit is 70% of the wages. If you want to have the refund a little bit faster, you can request advance payment from the IRS. To request the advance payment, you just need to file this Form 7200 with the IRS, and then that will get you the refund a lot quicker. Based on what we were told and what we’ve heard, it’s three to four weeks for the IRS to process Form 7200. There’s a slightly delay because the April 15 is a big tax deadline, so right now it can take a little bit longer, probably four or five weeks for the IRS to process a Form 7200.
So, if you know you’re eligible for the credit, then this is a way to get the money a little bit earlier. When you file Form 7200, there’s a couple numbers you need to estimate. Again, just estimate. Let’s say you file 7200 and estimate a million-dollar credit. And then when you filed the actual 941, you overestimate, you only get a credit for 900,000, then you have to pay the additional credit you receive. You have to pay it back when you file the 941. Vice versa, when you file a 7200, if they only estimate you getting a 800,000 credit, but when you filed the 941, you’re entitled to a million, then you can get additional refund when you file a 941.
For the 7200, there’s no banking information required. The IRS will mail the refund check to your business address on record. So usually it’s based on the return you filed, either the payroll tax return or the 990 you’ll file. For a nonprofit, once you file a 7200, you will receive an IRS letter 6313 to verify your business address. They want to make sure that the refund check was mailed to the right address. And again, when you request the advance payment then when you file the 941, then you had to do some reconciliation to you to pay back the additional credit, access credit you got, or claim the additional credit you’re entitled to.
Sorry. We have a lot of great questions and we probably will not get to all of them during the remaining 15 minutes of the presentation, but we’ll be sure to answer them all subsequent to the presentation. So I think I won’t pause you here with a few questions. I was going to, but why don’t we see if we have a few minutes at the end, everyone keep the questions coming. And if they’re not answered in this next 15 minutes, we will include an answer when we circulate everything at the end of the day, thank you.
So this is the big question as mentioned earlier, you cannot use the same wages for both ERC and PPP forgiveness. So how are you going to allocate your wages between the two and get the maximum benefit on both? But again, one thing to keep in mind that the PPP is a dollar to dollar benefit. So if you get the expenses of the loan forgiven, then it’s a dollar to dollar benefit. But for the ERC is a 70 cents on the dollar. And there’s some income tax implication on the ERC, which is that you cannot deduct the wages that you claim for the ERC. So there’s one limitation on ERC. So if you have to choose one of them, then definitely you want to pick PPP as your first choice.
But let’s say you now have a secondary PPP and you qualify for the PPP. You received your secondary PPP on March 1st, just to give an example. You know you qualify for the ERC because you have more than 20% reduction in your gross receipts in the first quarter of this year and you want to allocate because of the first two months of the wages that were paid before you receive your secondary PPP, then that will all go to ERC. For the wages you paid from March 1st to March 31st, then you must do some projection, play that out, because again, another thing to keep in mind is that for your PPP, the loan amount is based on 2.5 of your average month payroll. So, if you use the maximum 24 weeks forgiveness or covered period for your PPP, then your wages are still going to be a lot more, a lot higher than your loan amount. So you will have some access wages that you can allocate to ERC.
So again, here are some tips. First, you want to make sure that you use the maximum covered period of 24 weeks, for sure, even if you have a salary reduction or FTE reduction. You still want to use the 24 weeks because the reduction was applied to the total qualified expenses your payroll incurred during the 24-week period. You also want to maximize your 40% non-payroll costs for your PPP so you can preserve as much wages as possible for the ERC. Just a reminder, non-payroll cost expended is no longer just rent and utility interests. You can also include the personal protection equipment, certain operation expenses, certain supply costs, and qualified property damage costs. So after you maximize, and I do want to also mention that for your first PPP, if you already got your first PPP fully approved and forgiven, and you didn’t put any 40% non-payroll costs on the forgiveness application, and now you find out you qualify for the ERC for 2020, unfortunately you cannot go back and change your forgiveness application. So you’re a little bit out of luck there.
If you have not submitted your forgiveness application for the first PPP and now you qualify for the ERC for 2020, then there’s still a way for you to maximize your 40% non-payroll costs and use 60% on payroll costs. And again, for the 60% payroll cost, you can accrue your retirement plan contributions. You want to maximize your retirement plan contribution for the PPP forgiveness, and the rest will be your wages and healthcare benefits. Then we will allocate that between the PPP and ERC to maximize both.
There are also certain limitations for your PPP. If you use the 24-week period, the wages cap at 46,000 per person, then if you pay somebody more than that cap, that limit during the 24-week period, then the excess wages can be used for ERC. So that’s a 46,000 limit there. So again, there’s a different way to look at it. How are you going to allocate the wages? So, you want to consider all the factors and do some projection to make sure you maximize both. Now, I’m going to turn it to Cherie. She’s going to go over the compliance with the 990 reporting. If you’re eligible for the ERC, how it affects your 990 reporting.
Thank you, Bella. I’ll briefly touch on how the credit impacts the Form 990. Different from for-profit entities, the IRS hasn’t released guidance on how to report the credit on the Form 990. So we have two options. So we can’t report it the same way the for-profit entities are reporting it, which is as a reduction in extensive. So on the statement of functional expense, we would reduce salary and wages by the credit. The statement of functional expense has three buckets. It has the program service expense, management and general expense, and fundraising expense. We reduce the salary and wages by the credit for IRS compliance, which is fine.
One thing to consider is how that impacts your functional expense allocation. So, if most of those expenses that are reduced are in the program service column, when it comes to the charity watchdog ranking that could reduce or have an impact on your rankings, since they usually look at how much is in that program service column. We can always add a note on the schedule, explaining why there’s a reduction, but it’s something we’ll want to consider.
The other option is that we have to report the credit that is reported as other income on the statement of revenue and that will also be reported as other income on the public support test for those tax-exempt organizations that are required to get a 33 and a third percent of their support from the general public or from program service activities. When we report the credit on the public support test, it could reduce an organization’s public support test percentage. For organizations that aren’t concerned about meeting that test because they have a great amount of public support, it’s not a big deal. For other organizations that are towing the line on that 33 and a third percent, will have to consider that type of reporting.
Like I said, there’s no guidance yet. So the way we report this may or may not match the financial statement. If any new guidance comes out, we’ll be sure to alert you all through our newsletters. And that’s all I have for now. So I’ll pass it back to Bella to talk about other considerations.
Thank you Cherie. So the other consideration only given to the ERC is that… so we got this question a lot too. Let’s say if you are a part of the PEO or you use a PEO for your payroll filing, you are still eligible for the ERC. You just need to work with your PEO on how to amend your 941 or how to file the 7200. So let’s say you are a member with a PEO, you can file your own separate standalone form 7200. You just need to provide that information to your PO so they can reconcile that when they file the 941. And also, a lot of PEO we deal with is that they have a specific cutoff. Even so, the first quarter 941 is not due until April 30, but they said, “You need to provide me the ERC number or some estimate calculation by end of March, in order for them to timely incur or claim the ERC on your 941.” So you need to work with your EO on how to get the credit claim on the return.
A special provision as a part of the American Rescue Plan Act is that, in addition to expanding the credit until end of this year, if you are considered a recovery start-up business, you have a brand new business started after February 15, 2020, and if your gross receipt is a million or less in 2020, or 2021, then you can coin the ERC up to 50,000 per quarter in each of the quarters, the third and fourth quarter this year. So again, this can be a huge job benefit for those with start-up businesses. This only apply to the third and fourth quarter this year.
The other business that can benefit from this special provision, if you’re severely financially distressed business, if you have a more than 90% decline in your gross receipt in 2021 compared to 2019, then they waive the 500 full-time employee threshold. All wages qualify, but this only apply to the third and fourth quarter of this year.
The last thing I want to mention that the statute for amending your 2020 form 941 is April 2024. And again, this may be reviewed or audited by the IRS, so you want to make sure that you have the proper documentation to support a credit. So, like I mentioned earlier, if it’s based on a business suspension requirement, you have a governmental order. You want to have some printout on the government website to say, you are forced to close your business because of the government order. You rely on your reduction gross receipts, you want to make sure you have the financial statement, a quality financial statement to support the reduction. You need to keep all your payroll records. If you are a large employer, you have to make sure that you only include the wages paid while people are not working, for the credit. You need to have documentation to show how you allocated healthcare expenses and a copy of the 7200 file and 941 file.
And just for the third and fourth quarter ERC this year, if you claim for the Q3, Q4 this year, the statute got extended from four years to five years. So, the normal statute is three years, but really for ERC purposes, according to the IRS guidance, you need to keep all the records for at least four years. And then for the third and fourth quarter, the statute even got extended to five years. So that’s all I have for today. I know we’re a little bit short on time, so we’ll see how many questions we can go through.
Okay. Thank you, Bella. Thank you, Cherie. Great amount of information that you’ve passed along. I’m sure everyone appreciates it. You all have our contact information, feel free to reach out for individual questions that you might have. We will send around the slides and have answers to some of these questions. We just have a few minutes, Bella, I don’t know if you want to look at the questions, if you can see them and maybe pick one or two that you want to reinforce in the context of your presentation, or I can ask you, what do you think?
Maybe you can just ask the questions.
Okay. One question was, it says if the 2020 maximum of 10,000 per year, per employer, sorry, employee, is it actually 2,500 per quarter? What if you only qualify for one quarter? Is there a quarterly consideration there?
Is it for 2021 or 2020?
The question says 2020.
So 2020, the 10,000 is the wage limit and the credit is 50% of that 10,000 wage limit. So it’s a 5,000 per employee per year. The 2020 is a per year. So the 2021 is per quarter is 10,000 per employee, per quarter, but 2020 is per year. So the maximum you can claim for 2020 is 5,000.
Right. Let’s see. If you only pay health benefits for furloughed employees, can this qualify for reimbursement?
Well, let’s say if you are considered a large employer and you only pay the healthcare benefit while people are on furlough, it’s not qualified for the credit.
Okay. One question is, if a nonprofit organization has more than 500 employees, will it qualify for the credit at all?
Yes. You will, but only the wages you pay for people not working. A lot of times, it is still hard for employer to pay people for not working. So even if you have more than 500, you can still qualify for the credit, but again, you must go back and see if you meet either the gross receipt reduction test or have a suspension in your business operation. So, if you meet one of those two, then you qualify for the credit, but only the wages you paid when people are not working.
Well, this is worth reinforcing. I think you’ve covered it, but for PPP forgiveness, if we use the 24-week period and qualify with salaries only, so we didn’t include other expenses like rent, which would have shortened the forgiveness period, does this mean that we could have excluded, sorry, that we have to exclude the entire 24-week period, even though we could have qualified with a shorter period if we included other eligible expenses? Any thoughts on that?
As an example, let’s say you’ve got your first PPP. The loan amount is a million, but when you submit your first PPP forgiveness application, you only use payroll. You have $1.5 million in wages on the application. Then you do have a 500,000 of excess wages. Then you can use that additional 500,000 for the ERC, but the problem is that, if you never submitted your first forgiveness and now if you include some of the 40% non-payroll costs, then you can have 600,000 in wages. Then you will have more wages freed up for the ERC. But if you already have your forgiveness application approved, you cannot go back and amend it. The only way you can have the ERC on the wages included in the PPP forgiveness is only if you have wages in excess of the lower amount.
Okay. I see we’re at two o’clock. I want to say once again, thank you all very much for your attendance today. It’s wonderful to have the opportunity to provide some information that hopefully it’s helpful to you in your day to day running of your organizations or the organizations you work with. It’s our pleasure to work with you all and feel free to reach out to the contact info in front of you. And I look forward to speaking with you all again soon. Thank you very much. Have a great afternoon.
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